Monday, October 29, 2012

China’s big shift

As the ‘factory of the world’ faces rising labour and production
costs, Chinese companies are taking a closer look at Asean and
Thailand.

Oct 29, 2012Bangkok Post

Thailand and Southeast Asian countries continue
to be a magnet for investment by Chinese companies thanks to the growth
prospects of the region and the imminent formation of the Asean
Economic Community (AEC).

Vietnam overtook China to become the largest producer of Nike shoes in 2010.

“Chinese investors have shown a growing tendency to establish
production bases in Asean and Thailand is among the first countries to
which they pay attention,” said Bang-on Thitapaisalpol, the director of
the Guangzhou office of the Board of Investment (BoI).

She said there were many reasons for the trend but one of the
biggest
advantages Thailand has is its location in the centre of Asean,
where new rail and road links would help make Thailand the logistics
centre of the region.

Asean, which currently has about 600 million people and trade valued
in excess of $2 trillion, has seen its role gradually rise among
Chinese investors, who have either used the region as the source for
materials for their manufacturing sector or as export markets for
processed goods.

This has prompted a surge in two-way trade between China and Asean
which hit a new high last year, reflecting the gains made under free
trade agreement that took effect in 2010 between Asean and the world’s
second largest economy.

Last year China-Asean trade value totalled $362.3 billion, a surge
of 24% from 2010. In the first seven months of the year, the figure was
up 9% year-on-year to $220.57 billion. China’s top three Asean trade
partners are Malaysia, Thailand and Singapore.

Under the FTA, the average tariff on goods from Asean countries to China has been reduced to 0.1% from 9.8%.

Apart from this, there has been a gradual shift of production bases
from China to Asean nations over the past few months in response to
rising wages at home. As a result, some Asean members have started to
take China’s place as the “world’s factory”. Vietnam is a good example,
usurping China to become the largest producer of Nike shoes in 2010.

In July, the sportswear giant Adidas said it would close its only
affiliated factory in Jiangsu province, with plans to relocate the
factory to Myanmar.

Research by the United Nations Conference on Trade and Development
(Unctad) indicates that rising labour and production costs in China
have made it less competitive than some Asean economies.

Although Guangdong province is still the world’s biggest
manufacturer of computer parts, several electronics companies have
moved their factories to Asean countries, Chen Zhihua, president of the
Guangdong Computer Vendors’ Chamber of Commerce was quoted by Shanghai
Daily recently.

The Unctad investment report stated that $117 billion worth of
foreign direct investment went into Southeast Asia in 2011, up 26%
annually, while FDI to China rose only 8%.

Chen Jiagui, former associate dean of the Chinese Academy of Social
Sciences, said that transferring manufacturing to Southeast Asia is
inevitable as China has entered the next stage of industrialisation,
which means rising labour and land costs.

Research conducted by Unctad this year indicates that multinational
corporations believe Indonesia and Thailand have benefited greatly from
the relocation of industries there.

Vietnam can speak for the benefits of industrial relocation. After
Nike transferred more of its orders to Vietnam, the country saw its
manufacturing industry output value increase, as well as an overall
industrial upgrade that has allowed it to produce more high-end goods.

“Southeast Asian countries’ lower labour costs and land prices have
attracted more overseas and Chinese investors,” said Chen, adding that
less trade friction and avoidance of trade barriers also prompted
foreign companies to move their factories to Southeast Asia.

Ms Bang-on said that countries such as Thailand could benefit from
the shift although some concerns remain about the rising wages and the
security of industrial property after the calamitous floods of 2011.

“However, we didn’t see any impact from the inquiries of Chinese
investors who are interested in investing in Thailand,” she said.

During the first eight months of this year, Chinese investors
submitted 25 applications for investment support for projects worth
14.88 billion baht in total, which was higher than in the same period
last year.

Ms Bang-on said that language and transport, two obstacles perceived
by Chinese investors in the past, had now started to improve. Student
exchange programmes between Thailand and China have been helpful in
creating greater communication.

Apart from this, logistics and transport routes in the region have
also improved, so these positive factors will help expand two-way trade
and investment further, she said.

Bussarakum Sriratana, director of the services and consulting
division of the BoI, said that Thailand had high potential to support
foreign investors in a lot of industrial fields. Among them are for
agriculture and agro-industry, alternative energy, research and
development (R&D) business for biotechnology and nanotechnology,
molds and dies, software development, automobiles and parts, electronic
products and parts, machinery equipment and parts, and high value-added
natural rubber products.

Recent data collected by the BoI on Chinese investment in Thailand
from 2005-12 showed the total value of the projects was US$4.19
billion. The services sector led in value at $1.32 billion, followed by
metal products and machinery ($821.55 million), agriculture and
agro-industry ($750.43 million), minerals and ceramics ($729.46
million), chemicals and paper ($316.47 million), electrical and
electronic products ($127.59 million) and light industries such as
textiles ($117.31 million).

“I think China has high potential to invest in Thailand, especially
in five major industries,” said Ms Bussarakum. “They are automobiles
and auto parts, electronic products and parts, machinery equipment and
parts, alternative energy and high value-added natural rubber products.

“In these industries, we are confident that we can be a high-potential base for Chinese investors.”

Thailand was the world’s 15th largest automobile producer in 2011
and aims to move into the top 10 by 2015 with total output of 2.43
million units. Of all the tier-1 car and parts companies in Thailand,
54% are foreign majority-owned.

In the electronics and electrical products industry, Thailand is the
world’s largest hard disk drive (HDD) producer. The export value of
$53.95 billion for all electronic and electrical goods was ranked 24th
in the world.

“Our major products in this field are hard disk drives, integrated
circuits, televisions and air-conditioners. We also provide strong
supporting industries in electrical appliances such as compressors,
motors, plastic and metal parts,” Ms Bussarakum said.

Opportunities also exist in machinery and parts although Thailand
will remain dependent on foreign industrial machinery in the near term,
she added.

“We have high demand for machinery, especially in food and farm
machinery, alternative energy, energy conservation equipment, textile
machinery, automotive machinery, and for the mold and die industry.”

Thailand is the world’s largest producer of rubber but only 10% of
the natural rubber produced in Thailand has been utilised as a raw
material for value-added production.

Rubber exports last year were worth 397.07 billion baht, the fifth
highest-value export category. China was the largest export market for
Thai rubber with a total value of $4.94 billion.

“We would like to see more Chinese enterprises set up value-added
processing for rubber products in Thailand,” Ms Bussarakum said.